a. falcon real estate investment company, lp
TRANSCRIPT
2
A. Falcon Real Estate Investment Company, LP
• US Commercial Real Estate firm created in 1991 by Howard Hallengren and Jack Miller,both from Chase. Offers comprehensive services to high-net-worth individuals andinstitutional investors. 6 US Regional offices, an office in Beijing, expanding in LatinAmerica and the European Union. $ 3 bn AUMs of US commercial real estate. 100% Out-performance vs. its benchmark (NCREIF) in 17 years.
B. Jack Miller, Co-Founder (1991) / President (New York and Chicago)
• Co-Founded Falcon after serving as Manager of the Real Estate Investment at ChasePrivate Bank where he was responsible for property acquisition, property managementand mortgage financing. Before he was at The First National Bank of Chicago for 10years in the bank’s real estate investment division. He is a founding member of theAccounting Standards Committee of the National Council of Real Estate InvestmentFiduciaries, which is the coordinating group that sets accounting standards for U.S.institutional investors. Mr. Miller received a BS in accounting, a Master of finance in realestate from De Paul University, and an MBA from the University of Chicago.
Short Profile on Firm and Speaker
3
Conference Outline
Introduction
1. Publicly vs. Privately Held Commercial Real Estate
2. The International Perspective
Conclusion
4
Conference Outline
Introduction
1. Publicly vs. Privately Held Commercial Real Estate
2. The International Perspective
Conclusion
5
Traditional Global Asset Classes
A. Traditional
• Money Market
• Bonds
• Stocks (Listed Real Estate Investment Trusts: “REITs”)
B. Alternative
• Private Equity (“Private Equity funds”, “Private REITs” or “Club Deals”)
• Hedge Funds (“Sector Specific”: Real Estate)
• Structured Products (“Principal Protected” around RE indices or “REITs baskets”)
• Managed Futures
• Commodities
• Real Estate (Direct investment by one investor in one building or owner-occupied)
6
Traditional Global Real Estate Asset Classes
Direct PropertyInvestments
$ 23 Trillion
Real Estate
Securities
$ 2 Trillion
Whole Mortgage Structured Debt (CMOs, CLOs etc.)
Private Public
De
bt
E
qu
ity
GLOBAL REAL ESTATE
•$ 25 Trillion (50% US)
$ 16 Investment Grade
$ 9 Non-Investment Grade
($ 10 pure investments)
•20% vs. Global Stock + Bond
Market Cap.
• 7 times bigger than Hedge
Funds
• 12 times bigger than Private
Equity
Real Estate Evolves with Private Equity
7
2. Venture Capital Funding
IPO
High Yield Debt & Equity
Traditional Bank Loans
Follow-on Offerings
Public/Private Debt
Convertible Debt
Venture StagePrivate
Company
Mezzanine StagePrivate
Company
Growth StagePrivate/Public
Company
Late StagePrivate/Public
CompanyMature StagePrivate/Public
Company
1. Buyouts
Purchase of controlling interest with
substantial borrowed capital
Focuses on investing in companies with
high growth rates
Industry
Mezzanine
Distress
Real Estate
PIPE
8
Conference Outline
Introduction
1. Publicly vs. Privately Held Commercial Real Estate
2. The International Perspective
Conclusion
Risk / Return of Real Estate Investment Strategies
Opportunistic
Value-Added
Long/Short
Public Equity
Core Property
Public Debt
Whole Mortgage
Risk Perception
Source: Fund Evaluation Group and Falcon Asset Management
Positioning Debt/Equity vs. Public/Private
Debt
Equity
9
10
“US Housing Going down”
April 26th 2007
“ Foreign Real-Estate Funds Boom Firms Unveil Scores of New Plays, Spurred by Strong Returns and Growth in
Overseas REITs”. July 7, 2007
“Euro soars to new high against U.S. dollar”
July 10, 2007
“Subprime poor practice risks turning to malpractice”
July 4 2007
Too Much Information?
11
R. Bernstein: Merrill Lynch Chief US Strategist
12
• 91.5% of long-term total account performance including Stocks, Bonds, Money
Markets resulted from asset allocation decisions (statistically tested over the past 20
years)
• Mitigate the necessity of secondary market - like in REITs
Security Selection
4.6%
Market Timing
1.8%
Other Factors
2.1%
Asset Allocation
91.5%
Source: Ibbotson Associates, Inc.
Asset Allocation and Expected Return: 1
13
Source: 1995—2005 Source: BHF-BANK
HIGH
LOW MEDIUM HIGH
Risk %
Retu
rn %
LOW
MEDIUM
Private
Equity
Global
Real Estate
Hedge
Funds
CommoditiesOil
GoldGlobal Bonds
Global
Stocks
Global
Money Markets
Risk Adjusted Returns (+ Standard Deviation): 2
NAREIT NCREIF
Source: Falcon /NCREIF & NAREIT/ Columbia Business School
US Public vs. US Private Real Estate Returns
US Public RE Benchmark (50% leveraged) vs. Private Benchmark (Unleveraged)
14
REITs Trade at NAV Premium vs. Underlying Assets
Source: Green Street Advisors, Current as of May 2007
40%
30%
Long-term Average = 6.6%20%
10%
0%
-10%
-20%
-30%
15
16
When Real Estate > Stock Market Volatility
S&P 500 120 Day Volatility
REITs 120 Day Volatility
1994 1996 1998 2000 2002 2004 2006 2008
Source: Bloomberg / RMS & SPX 120 Day Return Volatility
17
S&P 500 FTSE 100 NCREIF Index FALCON
Total Quarters 62 62 62 62
Positive Quarters 67.74% 69.35% 87.10% 98.39%
Negative Quarters 32.26% 30.65% 12.90% 1.61%
Median Quarterly Return 2.41% 2.08% 2.36% 3.44%
Average Quarterly Return 2.47% 2.27% 2.08% 3.74%
Standard Deviation 7.43% 7.09% 1.84% 1.79%
Best Quarter 20.87% 25.13% 5.43% 10.42%
Worst Quarter -17.63% -17.80% -5.33% -0.14%
Maximum Drawdown -45.60% -45.55% -9.66% -0.14%
Sharpe Ratio* -0.04% -0.07% -0.37% 0.55%
Correlation Matrix S&P 500 FTSE 100 NCREIF Index FALCON
S&P 500 1.00 0.73 -0.04 -0.04
FTSE 100 1.00 0.01 0.02
NCREIF Index 1.00 0.77
FALCON 1.00
Falcon Performance Statistics vs. Benchmarks: January 1991 - June 2006
* Risk free rate is 2.75% (the average 5-yr T-Note from Jan '91 Š June '06
Source: Falcon
Correlation Coefficients (+ covariance): 3
18
Source: 1980—2000 Source: Merrill Lynch Quantitative & Equity Derivatives Research
15.50
15.00
14.50
14.00
13.50
13.00
12.50
12.00
11.50
10.00 10.50 11.00 11.50 12.00 12.50 13.00 13.50 14.00 14.50
Risk %
Retu
rn %
Efficient Frontier without
Alternative Investments
Efficient Frontier with 5%
Alternative Investments
Efficient Frontier with 10%
Alternative Investments
Steps 1+2+3 = Efficient Frontier
19
Cash
Bond
Equity
Alternative
Invest.
50-60%*
*Real assets, which includes real estate and commodities, is the largest investment category
with 31 cents of each Harvard endowment dollar.
How Much Alternative Investments?
Source: Falcon
20
Synopsis of Private vs. Public Real Estate
Public Equity Advantages
Publicly traded (liquid)
Lower fees
No minimum size (individual investors)
Public Equity Disadvantages
Theoretically, lower returns
due to liquidity premium
Performance often driven by capital flows and
other non- real estate related factors
Higher correlation to public stock markets
Private Equity Advantages
Access to broader array of investments
Lower correlation to stock markets
Private Equity Disadvantages
Illiquid
Higher fees
Appraisal-based valuations
Difficult to benchmark
High dispersion of returns in value-added
and opportunistic sectors
21
Conference Outline
Introduction
1. Publicly vs. Privately Held Commercial Real Estate
2. The International Perspective
Conclusion
•Financial Markets offer broader access to capital from borrowers
•Financial Markets offer more efficient pricing
• Financial Markets increase opportunities for sharing risk BUT…
• Lately securitization has led to substantial increases in leverage and greater systemic risk for the entire financial system
0 100 200
1990
1995
2000
2005
2006TOTAL
Bank Deposits
Government Debt
Corporate Debt
Equities
Global Financial Markets (Excluding Derivatives)
Source: McKinsey Global Institute
Global: GDP $ 60 Trillion vs. $ 180 Trillion Listed
22
23
• 1990: 33 countries have domestic market capitalization (excluding derivatives) > GDP
• 2006: 72 countries – virtually all industrial economies and the largest emerging markets have financial markets that are two to three times the size of their GDP
Real Economy/Financial Markets Decoupling: G7?
Source: McKinsey Global Institute
Global Real Estate Markets As of January 07
•Invested stock
$3.2 trillion
•Mature/ Highly Mature: 83%•Maturing: 15%•Emerging: 2%
•Investable stock$6.1 trillion
Europe / Russia
•Invested stock
$4.7 trillion
•Total stock $9.2 trillion
Americas Total stock•$9.5 trillion
•Investable stock$6.6 trillion •Invested
stock$1.9 trillion
Middle East / Asia Total stock
•$5.9 trillion
•97%•Mature/ Highly Mature:
•Maturing:
•Emerging:
•1%•Investable stock
$3.5 trillion•1%
•Mature/ Highly Mature: 17%•Maturing: 72%•Emerging: 11%
Sources: RREEF; DTZ; ULI; PwC
Inter-regional capital flows of $115bn in H1 2007
24
25
International Real Estate Risk Adjusted Returns?
Returns and Risk of Public Property Securities Markets
(1993-2006, in U.S. dollars)
Source: Morgan Stanley, Global Property Research
•Returns and risk for public real estate securities in various regions around the world can
produce half of the returns for twice the risk and can produce twice the returns for half the risk
depending what you targeted country allocation is.
•Returns for Asia were for instance lower than other regions due to problems the region has
faced, including a weak Japanese real estate market for more than a decade and the SARS
outbreak in 2003
Return Standard
Deviation
U.S. 13.60% 14.90%
Europe 13.90% 14.40%
Asia 7.40% 33.20%
Australia 16.60% 18.20%
26
Correlation: International Real Estate Markets?
• International diversification within public real estate equities is beneficial due to the low
correlations of public real estate equities between various global regions
Correlation of Public Property Securities Markets
(1993-2006, in U.S. dollars)
U.S. Europe Asia Australia
U.S. 1 0.5 0.32 0.4
Europe 0.5 1 0.34 0.52
Asia 0.32 0.34 1 0.44
Australia 0.4 0.52 0.44 1
Source: Morgan Stanley, Global Property Research
AustraliaHong KongJapanOther Asian
France GermanyItalySpain NetherlandsOther EurozoneUKSwitzerland SwedenC & E Europe Other European USCanadaMexicoBrazilOther
Japan 11%Euro
zone
10%
Americas 57% Europe 18%
US 53%
Australia
9%Asia-Pacific
25%
Hong Kong5%
UK 6%
Sources: EPRA/NAREIT, LaSalle Investment Management
2007: $ 2 Trillion Listed Real Estate
27
28
Public and Private Real Estate Room to Grow
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Global North
America
Latin
America
Europe Asia-
Pacific
Middle
East
HNI's Real Estate Investments (2006)
REIT Commercial Residential* * Secondary Residence
Source: Merrill Lynch/Cap Gemini
The Luxembourg Fund Center
8 426
4 542
1 839
2 176
0
1 000
2 000
3 000
4 000
5 000
6 000
7 000
8 000
9 000
USA Europe Asia & Pacific
Luxembourg is the second
largest fund center in the
world after the USA
2007 Worldwide Mutual Funds
€ billions
Sources: EFAMA & ICI
29
Luxembourg Real Estate Funds: Before the SIF
30
AUM and Number of RE Funds
48
80
129
3636
0
5
10
15
20
25
30
35
40
02 03 04 05 06
AU
M U
SD
bln
0
20
40
60
80
100
120
140
Nu
mb
er
of
su
bfu
nd
s
AUM # (sub)funds
• Huge growth since 2004
• Closed-end and Open-end funds and funds of funds
Reasons for success:
• Strong yet flexible Regulation
• Cheaper for Fund Managers than the US
• Reputation of location
• Centre of sophisticated real estate investment funds
Global promoter base
Global investor base
• Tax efficiency and stability
SIF : Market Overview
Specialized investment funds launched since February 13, 2007
8 1225
38
72
93
115 119
220
0
50
100
150
200
250
2007-
02
2007-
03
2007-
04
2007-
05
2007-
06
2007-
07
2007-
08
2007-
09
2007-
12
31
SIF Launched in Feb. 07 is a Favored Structure
Profile of Luxembourg Investment Funds
Key criteria UCITS Non-UCITS SIF SICAR
Investment
restrictions (eligible
assets)
Restricted Flexible Flexible Moderate
Risk diversification High Medium Low None
Ease of public
distribution
High Medium Low Low
Supervisory
framework
Targeted to
retail investor
protection
Targeted to retail
investor protection
More flexible More flexible
Time to establish Low - Medium Medium - High Very low Low
Target investors All All Institutional /
HNWI
Institutional /
HNWI
32
The SIF Features are Tailored for Real Estate
Key Features UCITs Non-UCITs SIF SICAR
Umbrella structures Yes Yes Yes Yes(1)
Share-classes Yes Yes Yes Yes
Debt financing No No Yes Yes
Leverage No Yes Yes Yes
Valuation basisProbable realization
value
Probable
realization valueFair value
Probable
realization value
Subscription/
redemption priceNAV NAV
As per offering
documentNAV
NAV frequency
(minimum)Monthly Monthly Annual Annual (1)
Open or closed ended Open ended Both Both Both
Annual Report Yes Yes Yes Yes
Semi-annual report Yes Yes No No
Regulatory Reporting Yes Yes No No
33
The SIF: In a Nutshell
34
• Eligible investor base: Investment in a SIF
is reserved for “well-informed” investors
requiring a limited level of protection and
looking for investment flexibility suitable to
their particular expertise and needs.
• Investment flexibility: the range of assets
(nature of assets and/or associated risks)
eligible for a SIF is broad and consequently
includes, but is not limited to, equities,
bonds, derivatives, structured products,
real estate, hedge funds and private equity
type investments. The SIF should comply
with the general principle of risk
diversification.
• Light supervision
• Organisational adaptability
• Efficient tax regime
Criteria SIF
REGULATORY
Regulated vehicle? Yes
Pre-approval by regulator? No
Other than local GAAP? Yes
Investment restrictions? No
Investment in RE, PE, HF? All
Simplified prospectus regime? Yes
TAX
Subscription tax? Yes
Income tax? No
Access to DTT? Yes / No
Withholding tax on dividends
paid? (residents / non
residents)
No
Standard VAT rate? 15 %
DISTRIBUTION
Listing possible? Yes / No
Maximum number of
investors?No
Minimum investment
amount?Min. € 125k
Minimum experience
required?Yes
LICENSING
Service providers / persons
subject to regulator's
approval?
•Directors
•Custodian
•Auditor
Pension Funds Pooling: Increasingly In Demand
35
• Quantitative benefits:Economies of scales at asset management & custodian bank level up to 0.70% savings
• Qualitative benefits;Improve measurement/selection of service providerEnable consistent/centralized corporate governance.
• Multinationals running pension funds in several countries have implemented pension pooling vehicle
British
Pension
Fund
Irish
Pension
Fund
Chilean
Pension
Fund
Brazil
Pension
Fund
British
Pension
Fund
Irish
Pension
Fund
Chilean
Pension
Fund
Brazil
Pension
Fund
Investments Investments Investments Investments
Depositary bank
Paying agent
Administrative agent
Transfer agent
Auditors
Law consultant
Tax consultant
Asset administrator
Virtual or entity pension pooling
Investments
Shares DepositReal
EstateBonds
Converted in
36
Conference Outline
Introduction
1. Publicly vs. Privately Held Commercial Real Estate
2. The International Perspective
Conclusion
Conclusion
37
A. Privately Held vs. Publicly Held Real Estate
• Each have their own merit, even if the Privately-held RE is likely to continue to dominate
• Clearly Commercial Real Estate in all its forms will continue to grow for all the reasons we discussed
B. International Perspective
• Trend # 1; Hard Assets logic inescapable
• Trend # 2: The Global Real Estate market will continue to integrate
• Trend # 3: The Luxembourg Real Estate Funds will continue to grow
38
Questions & Answers
Muchas Gracias !
Jack D. MillerPresident
Falcon Real Estate Investment Company, LP150 North Michigan Avenue, Suite 2700, Chicago, IL 60601
Tel: (312) 240-9195, Fax: (312) 240-9194, E-mail: [email protected]